Growth rate of wages reminds us that days of cheap labour are over

In the third quarter of 2019, the average monthly gross wage of employees in Latvia increased by 8.3% year-on-year. The pace of remuneration growth remains high and, in the long run, could affect the competitiveness of Latvia's goods and services.

The data released by the Central Statistical Bureau of Latvia show that the average monthly gross wage of employees reached 1091 euro in the third quarter. The average gross wages and salaries grew by 8.3% year-on-year in the third quarter of 2019, recording a higher increase than in the first two quarters of 2019, while remaining below the growth rate of 2018. Meanwhile, the average real net wage increased at a slower rate, i.e. by 4.7% year-on-year).

The growth rate of wages can be viewed as high not only in Latvia in the post-crisis period, but also in the European Union overall. This requires particular attention because membership in the European Union entails free movement of workers, and we have already seen our labour emigrate in search of higher wages.

The slowest wage growth is recorded in the high-wage countries, e.g. the so-called old European Union Member States such as France, Italy, Denmark and the Netherlands. This is due to the fact that wages in these countries are already high and, therefore, their percentage increases are less significant.

Furthermore, when attracting employees, businesses do not compete with countries offering significantly higher wages. Meanwhile, the steepest rise in wages was observed in the low-wage countries which joined the European Union later: Romania, Lithuania, Hungary, Bulgaria and also Latvia.

The above heterogeneity in remuneration growth implies that the wage gap between the new and old European Union countries is shrinking. Thus, employees will be less motivated to emigrate for higher wages. At Latvijas Banka's annual economic conference earlier this year, Latvijas Banka's economist Uldis Rutkaste already pointed out that the average nominal wage in the Baltic States was nearing the minimum wage in the UK (expressed in euro). At the same time, if we consider the purchasing power parity (price level differences), an employee in Latvia receiving the average wage can afford more than an employee in the UK receiving the minimum wage.

On the upside, higher wages allow businesses to be more competitive when attracting high-skilled labour.

On the downside, however, the overall increase in labour costs is lowering their cost competitiveness, at least in the European Union. Thus, competing in external markets with lower production costs alone becomes increasingly more difficult as the production costs increase along with the rising wages. To lower the production costs, we need to introduce productivity-raising solutions that are at least equivalent to the Western standard.

Therefore, we should already consider what will be our future competitive advantages: high productivity, unique solutions, ecological products or maybe something entirely different?